Actual Cash Value vs. Replacement Cost Homeowners Insurance


According to past research conducted by, almost half of the homeowners don’t know how to differentiate between actual cash value and replacement cost. In that regard, this article clarifies between the two for you to better understand the concept.

What is Actual Cash Value?

Actual cash value refers to an insurance company’s cost to homeowner insurance policyholders as compensation for the property damaged or lost. It’s determined after the deduction of the depreciation cost. Below is the formula:

 ACV=Replacement cost -Depreciation

In other words, it represents the selling price of the property at the time of loss. The depreciation cost is determinable by the type of policy you choose. Your insurer can determine the value by either doing a proper physical assessment or using any previous repair information. To understand better, let’s have a look at this example;

You have a couch that you bought for $5000.Unfortunately, your house gets burnt. You then decide to approach your insurer to compensate you for the loss. If your policy uses ACV to calculate the amount to pay for the loss, you will get less the amount upon compensation. That is because the actual cash-value takes into consideration the depreciation. Another way of determining the cost apart from using the actual property as a point of reference is to differentiate between purchase and loss.

Why do people choose actual cash value?

Some people like it because it is cheaper compared to other available options. Choosing it makes it easier for them to save a significant amount in the long run. However, the only drawback is that the compensation cost is calculated based on that time’s depreciative value of the property in the event of a loss.

What is the replacement cost then?

As the name goes, it is a form of compensation that allows you to acquire another property or item of the same quality and nature as that which was damaged.

Here is an Instance

Assuming you lose property and it happens that your homeowners insurance coverage uses replacement-cost, you are likely to spend none of the money on replacing the item because it’s your insurer’s mandate.

The Replacement Cost Compensation Procedure

Every company has a policy that dictates how it operates. Similarly, insurance companies have such policies to adhere to whenever they compensate you for losing your property. Surprisingly, some people do believe that they are entitled to full compensation immediately after a loss occurs. Unfortunately, that’s not always the case since the company policies determine everything.

If you incur a loss, and your homeowners insurance dictates that you use this compensatory option, you will have to write all the items damaged or lost. From there, the insurer will take some duration reviewing your request. You will then receive your compensation if the review process is successful. Furthermore, to make the option work best for you, you can go for an extended replacement cost.

You may be asking yourself the difference between the two. Opting for extended replacement cost qualifies you for a higher compensation regardless of your insurer’s specified limit. It allows for compensation of 125% to 150%.

Its advantage is that you will be fully compensated and get back to your initial status without spending any extra coin. Choosing extended replacement cost will also make you have confidence when approaching your insurer because you will be sure of the amount of compensation you are entitled to.

Besides, you can also opt for an alternative policy plan known as a guaranteed replacement cost. It allows you to get full coverage despite the specified limit. In case of a property loss, a guaranteed replacement cost will enable you to get total compensation. In the case of a house, the option will allow you to rebuild your home without having to struggle. It is one of the best dwelling coverage ever.

Opting for extended replacement cost is a good option for you when choosing a good dwelling coverage. Also, guaranteed replacement cost is a better option considering the highlighted benefit above.


All coverage options have their pros & cons it really comes down to the type of risk & level of risk the property owner is comfortable with. It’s also important to point out that each settlement option has certain eligibility requirements, this is where it’s important to discuss with your agent to ensure both your coverage requirements are met and the proper policy is written. Available coverage options vary based on state, property location, property type, age of dwelling, occupancy, condition of property, and other underwriting factors determined by each individual carrier. We recommend discussing this information with a licensed agent prior to purchase of any coverage.  If you’re interested in learning more, have a few questions, or would like a quick coverage review please give us a call and we’d be delighted to speak with you.


CityScape Insurance, LLC have used their best efforts in preparing this website resource. CityScape Insurance, LLC makes no representations or warranties with respect to the accuracy or completeness of the contents of this webpage and specifically disclaims any implied definitions and/or usage implied usage within. The accuracy and completeness of the information provided are not guaranteed or warranted to produce any particular results. Neither the publisher nor author shall be liable for any loss of profit or any other personal or commercial damages, including but not limited to special, incidental, consequential, or other damage.

Implications of a General Liability Audit on Small Business


General Liability Audit

The What & Why You Received An Audit

Business conditions are liable to a multitude of changes that might impact the growth of a business. Small businesses should be able to handle changes in government regulations, personnel shifts, and technological advances. These small changes often change a company’s exposure to liability lawsuits. The general liability auditing determines if the company’s policy is adequate and if adjustments in its premiums, deductibles, and coverage are required to accommodate any changes in the business.

General Liability Auditing

Most of the data required during an audit come from the federal payroll tax returns. The company’s payroll information is vital when it comes to establishing how much risk the company is exposed to.

The auditor also checks if the company has proper employee classification concerning which area of expertise each employee is based. Classifying each employee depending on the jobs they do means that all the employees are exposed to different levels of risk and, therefore, should be insured in the same manner.

General Liability audits are supposed to inform the business owner about the company’s changes that might affect its liability. It also confirms the adequacy of business insurance that covers the company.

Preparing for a general inspection is easy. You should dig out the business insurance documentation and payroll data, which will help the auditor to determine if the current policy provides adequate protection against risks.

There are two types of liability audits. They include a sales-based inspection and a payroll-based review, which are discussed in detail down below.

Payroll-Based Audits

A payroll audit analyses the company’s payroll to ensure accurate documentation that can easily portray each employee’s exposure to risk. An auditor examines tax withholding, wages, and employee pay rates.

A proper payroll review should be conducted at least once every year to ensure that the process is up to date.

A payroll-based review is one that requires particular company documentation. It requires the company’s accountants to provide an accurate payroll breakdown in adherence to the federal payroll tax returns.

While preparing payroll-based audits, some of the vital documentation required includes source documents that have proof of all the transactions conducted by the company during the policy period and verification documents from the revenues office.

Apart from the insurance implications of a payroll review, the findings of this review can also be used in preventing payroll fraud while even weeding out ghost employees in the system.

The review is also meant to verify that the tax withholding is accurate and are compliant to the employment rules and regulations.

Sales Based Insurance Audits

When conducting a sales-based insurance review, some of the critical documents required by insurance providers include source documents and verification documents.

This type of inspection will require the business owner to provide sales information from the policy period. Some of the source documents needed during this review include sales journals, general ledgers, and income statements.

Verification documents include; federal tax returns, state sales tax returns, and income statements depicting the profits and losses in the business.

How to Prepare for a General Insurance Audit

Below are some of the critical factors that you need to consider when you are preparing for a liability review by your insurer:

1. Determine each employee’s class code and separate the payrolls

Each employee should be classified to depict the total risk exposure when they are at work. For instance, a construction worker has high liability as compared to an office clerk.

Some employees also participate in both upper and low-risk jobs, thus requiring the employer to split the payrolls to get the exact amount needed to be insured.

2. Check the payroll and sales estimates in the current policy.

This is done to ensure that the company remains on track in terms of the last policy. This helps small business owners to keep track of all the record all the payrolls throughout the year to avoid large review bills.

The estimate given at the beginning of one’s policy can be adjusted to suit the changes that have occurred in the business during the policy period.

3. Collect insurance certificates from all the subcontractors you use.

Collecting insurance certificates from the subcontractors you have used will allow the auditors to assess the extent of liability the company is exposed to under such operations.

4. Simplify the auditor’s job.

In most cases, an insurance provider will inform the small business owner before sending an auditor. Therefore, it is both time and cost-effective to have all the required documentation ready for the review.

In some cases, business owners often appoint an employee with a proper understanding of the company’s financials to assist with the audits.

Bottom Line

One of the critical areas of running a small business or company that should not be neglected entirely is the general insurance auditing. Failure to comply with the company’s review reports might lead to falling short of its bottom line.

Insurance companies are legally allowed to estimate the extent of liability and thus calculate even higher premiums if business owners refuse to conduct liability audits.
The goal of a review is to bring awareness to situations that can affect your insurance premiums.

These include changes in employee wages, taking up new clients, or shifting the business dynamic to more high-risk clients.

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